What Should New Parents Do to Manage Their Finances?
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For Sarah and her husband, Alex, life changed in an instant when they welcomed their son, Liam, into the world. As busy tech professionals, they had previously put future planning on the back burner. But the moment Liam entered their lives, a new sense of responsibility kicked in. Now, they’re on a mission to secure a financially stable future for their family. Here’s how they navigated essential financial steps to pave the way for a bright, secure tomorrow.
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Let’s take a closer look at the pivotal decisions they made and the strategies they implemented to ensure Liam’s future is not just secure, but thriving. If you want to dive deeper into how 529 Plans can help secure your child’s educational future, check out this video for expert insights and practical tips!
Key Takeaways:
- Build an emergency fund to cover 3-6 months of expenses
- Use life and disability insurance to protect family income
- Create wills, trusts, and directives to ensure your wishes are honored
- Save for education and special needs with tax-efficient 529 and ABLE accounts.
Establish an Emergency Fund
Why start an emergency fund?: An emergency fund should provide you temporary support in case you lose your job. It is not meant to protect you against unforeseen catastrophes like disability or death. For those, you need to have enough insurance. In our practice, we see many prospective clients keep too much cash idle to protect them against catastrophes. This ends up costing you a lot in lost investment returns and might not even be sufficient if a real emergency comes up. One of the things we help clients determine is how much money they truly need to keep in cash to protect them against emergencies.
Determining the Right Amount: The couple reviewed their budget carefully, estimating 3–6 months’ worth of essential expenses. This helped them establish an emergency fund that covered their necessities without tying up too much cash. This balance allowed them to set aside funds for unexpected needs and invest for Liam’s long-term future.
Protecting Against Unforeseen Circumstances with Insurance
Evaluating Life and Disability Insurance: Life and disability insurance became a priority for Sarah and Alex. They recognized that if one or both were unable to work, their income would be affected, impacting Liam’s future. By securing the right policies, they could ensure Liam would still have the financial support he needed.
Assessing Life Insurance Needs: Since they both had dependents, life insurance was critical. After reviewing their employer policies, they found that their work-provided insurance had low coverage and wasn’t portable if they changed jobs. To ensure Liam’s security, they each opted for individual term life policies with enough coverage to see him through college.
Choosing Between Term and Permanent Life Insurance: Term life insurance provided them with an affordable option that matched their needs. They selected 20-year term policies, which allowed them to allocate funds toward other financial goals. While they considered permanent life insurance, its higher premiums made term insurance a better fit for now.
Disability Insurance: Sarah and Alex also invested in long-term disability insurance to replace a significant portion of their income if either couldn’t work due to illness or injury. This policy served as a critical backup, offering peace of mind that Liam’s needs would be met no matter what.
Estate Planning: Will, Trust, and Key Documents
The Importance of a Will and Trust: Creating a will allowed Sarah and Alex to name guardians for Liam and establish conservators to manage his finances. They also looked into a trust, which would help Liam access funds responsibly as he grew. Trusts can be especially beneficial for families with complex financial situations, providing added structure and control.
Additional Legal Documents: To ensure seamless management of their finances in case of incapacity, Sarah and Alex also established durable powers of attorney and advanced healthcare directives. These documents meant that trusted individuals could make decisions on their behalf if needed, easing the burden on their family.
Next Steps in Estate Planning
The couple worked with an estate attorney with the help of a financial advisor to draft these documents, tailored to their specific circumstances. This provided them with confidence that Liam’s well-being would be safeguarded.
Creating a Foundation for Education with a 529 College Savings Plan
Understanding 529 Plans: With an eye on Liam’s future, Saraah and Alex explored 529 plans, which allow for tax-advantaged savings for education. Contributions grow tax-free, and withdrawals for qualified education expenses remain untaxed, maximizing Liam’s educational funds.
Setting Up the Plan: They named Liam as the beneficiary and contributed regularly to the 529 account. Over time, they knew these funds would grow, giving Liam financial freedom to pursue his dreams without the burden of student loans.
Special Needs Planning for the Unexpected
A New Chapter with New Considerations: A few years later, Sarah and Alex welcomed their daughter, Alice, who had special needs. Knowing that government programs like SSI and Medicaid could support her, they faced the additional challenge of securing her future without impacting her eligibility.
Special Needs Trust: The couple created a special needs trust, allowing them to save for Alice’s care without risking her government benefits. This trust provided a way for Alice to access funds beyond her basic needs, ensuring she would always have the support required for a good quality of life.
529 ABLE Accounts: They also set up a 529 ABLE account, similar to a traditional 529 but designed for individuals with disabilities. This account could cover a broad range of expenses, like healthcare and job training, without impacting Alice’s benefits.
Final Thoughts
For Sarah and Alex, each financial decision became an expression of love and responsibility. Parenthood urged them to look beyond the present and build a future that would provide Liam and Alice with security and opportunity. The steps they took created a foundation of protection, empowerment, and hope for their children’s lives ahead.
Next Steps For You:
Assess your family’s unique financial needs, then consider building an emergency fund, evaluating insurance options. Book a call below to consult with a financial advisor to tailor a future-focused plan for your loved ones.
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